The Weird, Big Business of Microdramas

23:14Peter Kafka:We're going to do, you know, 22 minute shows or hour shows or two hour movies, or do you want to stay with microdramas? Very good question, Peter. So like overall, like we're building the operating system for storytellers. So the idea of the company is to help storytellers create a bestselling book, a best-selling audiobook, create a movie. We're distributing on Prime Video now. Starting next month, we're distributing on Roku. We want to have cinematic movies that you can watch in the cinema. We're creating our own theme parks at some point. So the idea is to really help storytellers tell their stories in all possible formats.

24:00Peter Kafka:There's an ongoing story about the contraction in Hollywood, film and TV business. Lots of people who made a living in Los Angeles making those things can't do it anymore. You're in San Francisco. Does the success of your company, if you're in L.A. and you used to make movies and TV shows or you're casting about for work, should you look at microdramas as an opportunity that you could start getting into? or is this something that's going to sort of accelerate the fact that it's harder and harder to make a living making movies and television shows? Oh my God. Peter, I think we're just about to see how Hollywood used to be in the 1920s when it used to be like a really big thing.

24:42And I think that's just like a starting point. I think Hollywood just doesn't have enough directors, scriptwriters, and crew to support the boom that is about to happen. And microdramas is just like a portion of it. But then there is also AI movies. Because AI movies, if you want to have a really good AI movie out there, it needs a lot of help from directors, scriptwriters, video producers. There is so much that goes into it. And I think the future of Hollywood is extremely bright and it's starting now.

25:17Peter Kafka:So you and your company are not in Hollywood. You are going to help save Hollywood nonetheless. We will. We have a subsidiary in LA. We do a lot of our productions in LA. I'm in LA quite a lot. But I think one of the things that maybe will happen with this boom is that you can be anywhere and you can create AI movies and it allows you to work remotely from anywhere. I really enjoy this conversation. I suggest that anyone who's listening to us, go check out Candy Jar, go check out Iron Blood. You click around, you get a lot of free content. You'll know exactly what we're talking about. Thank you for walking us through this.

25:56Peter Kafka:Thank you so much, Peter. Thanks again to Ali Abazaz from Ink It and Candy Jar and Iron Blood. In a minute, we're going to hear from Owl & Company's Hernan Lopez, who's going to give us the big picture view. But first, this.

26:17Peter Kafka:I'm here with Hernan Lopez. He is the founder of Owl & Co. He's done many things. We can go into his bio briefly, but he's on the show because he studies and consults on the video business, something we care a lot about on this show. He's going to explain the business of microdramas to us. Welcome, Hernan. Thank you for having me. Returning champion. Yes, the last time you were on this show, you were running Wondery, which was a podcast network, which eventually got sold to Amazon. That's right. There is a ton of talk about microdramas. I think for the last year or so, I've tried to ignore it, but I think it might be a real business.

26:54Peter Kafka:In your latest report, you plug microdramas or you estimate that microdramas are a$4 billion business worldwide, not including China, which is where they started. Do I have the number right? That is correct. This was the study that tried to size all of vertical video, which we think is a third audiovisual language, should be thought about as a different alternative to television and film. Film and television, first and second audiovisual languages, they've been around for decades. They coexisted for many years and they were very separate up until very recently. And vertical is the first time that I see something genuinely different.

27:35And within vertical, microdramas are the space that probably captures the most questions from the Hollywood community because they resemble television shows and movies more than all the other formats that are part of vertical. And the analogy that I make is that microdramas may be too vertical what soap operas were to television in the 1950s.

28:00Peter Kafka:Sort of the first product that people can make that has an audience and then you expand from there. That's exactly right. So these are two-hour movies or two-hour shows cut up into basically one segments of about a minute or so. The predominant business model is hand people free clips and then eventually get them to pay for the rest, kind of like free-to-play games. There are many, exactly. There are many parallels between the early microcoma industry anyway and mobile gaming. Most of these companies spend a significant part of their revenue in customer acquisition to get viewers hooked on the first 10 episodes or whenever they hit the paywall.

28:43And after they hit the paywall, they are either buying coins or subscribing on a weekly or monthly basis for the rights to watch the rest of the show. But that's changing, too. What's happened in China first, and I think it's going to happen as well, is just as we always see a migration from many different business models. The first one was in-app purchases. Then most of the apps started to try to get people to subscribe, to retain them for longer periods of time. But then what happened is that as with any format that needs to become widely popular, advertising is going to eventually become a significant source of revenue.

29:28So in China today, for example, more than half of all microdrama revenue comes from advertising. That's slowly going to be the case outside of China.

29:39Peter Kafka:The$4 billion number that I cited at the beginning outside of China, so that's mostly customers paying the micro drama producers subscriptions so they can see unlimited content. That's right. Those in-app purchases of people who are paying to watch just one show, and then when some other apps are doing it, they're trying to drive more of their people to become yearly subscribers to follow the Netflix model so that viewers will be able to watch as many shows as they would like. So, I have a U.S.-centric bias here. In the U.S., who's a microdrama consumer? We're awash in free video. or awash in paid video options.

30:20Peter Kafka:It doesn't seem like there was a need to produce one-minute segments of stories specifically for this audience. They already can watch one-minute segments for free on TikTok. What is a microdrama watcher and consumer, what would they be doing with their time and money prior to this? They were watching streaming, perhaps. They were watching social media. They were watching YouTube and they were not finding exactly what they wanted. If you watch any short drama, any micro drama today, you will find that the storylines are more, in many respects, they're different. There's more fast pacing. They have, in many respects, they're going after different storylines that you don't see as frequently in streaming and entertainment.

31:19And you're going to find a sharper pace, more of an exposition that you do in, of a fast exposition that you do in television. And again, there are many people that think the reason why romance is the number one genre is that there was an undersupply of romance in streaming in general.

31:42Peter Kafka:That's really hard to believe. I understand that over the years, sort of romance, and there's different genres that fall in and out of popularity with companies, producers, but romance, soap operas, that's a core tenet of entertainment. You talked about being the mainstay of TV in the 50s. You would think people would be rushing to fill this space from the get-go. They know that people respond to this stuff. Why did it take so long for people to figure out, oh, we'll deliver it to them via microdramas? I think partially is the reason that we are looking at different moments of the day when consumers are watching micro dramas.

32:19It is true they're watching throughout the day, but sometimes they're starting to watch in the middle of a break during the day when they wouldn't necessarily think about watching streaming or if they do have access to streaming. They don't have 22 minutes or one hour in order to make sure they get into the show. So they'll watch several episodes. And then when they come home at night, they will watch the rest. There's this misconception that all microgramma viewing happens during the day. Reality prime time is really at night, at home.

32:50Peter Kafka:So you snack on it when you're standing in line for your salad or on the bus or wherever, and then you watch the whole thing at home. You said something earlier that really struck me in your report. Upwards of 70 % of revenue is being spent on marketing, customer acquisition. that's a very high number. It makes me think that we might be in a period where people are spending a lot of money to acquire customers and might have a hard time retaining them. How much is the industry sort of grappling with that spend and whether they're actually just sort of subsidizing TikTok and Apple instead of growing their own business?

33:29The 70 % figure came from the leading app, and it combined both customer acquisition and app store fees. So together, real short, according to reports we've seen, spending 55 and almost 30 from upstore fees in addition to the 55. So, and you can make the argument that the reason why the early, the winners, like real short, the companies that are on track to make a billion dollars in revenue this year, are spending so much of the total revenue is that they are still in customer growth mode, very much like TikTok was in 2020, very popular, found organically, and was still spending a significant amount in customer acquisition on Snapchat and on Meta, on Facebook, until there was a time in which they didn't need to spend anymore.

34:20So I think the industry is still trying to solve a similar issue of how much of the total spend should be allocated to customer acquisition versus content and how to better retain customers. You're going to see some companies, CandyJar is a great example, that instead of privileging the traditional in-app purchases model, they're trying to get people to become yearly subscribers at a price point that will be very competitive compared to what many companies, many people are spending on a weekly subscription on the traditional microgram apps.

35:02Peter Kafka:I mean, we're all familiar with the idea of go spend a lot to acquire customers, figure out profit later. There's plenty of examples where that works. There's also a lot of examples where that hasn't worked. I'm thinking of the direct-to-consumer. I'm an expert in this. You know, the retail businesses we saw, these digital native retail businesses we saw sprouting up 10 years ago, fueled by VC money, got very, very good at creating brands, finding customers. And then when it came to sort of operating a luggage business or a clothing business or a home cookware business, it turned out that was they couldn't sort of crack the code here.

35:38Peter Kafka:But do you think the people who are making micro dramas today have some special skill set that's going to create a moat for them and that's going to allow them to run a sustainable business? I do, especially the ones that are leading the charge company, like Ritual, like Drama Box, Candy Jar, Hollywater Tech, a company out of Europe in which Fox became an investment last year. many of them have connections to the world of web novels that they use as their initial source of IP. And they have a specific kind of expertise that comes particularly from web novels, from trying to iterate on what makes people continue to subscribe to and pay for web novels.

36:23And that skill set is very translatable, not just the stories themselves, but the skill set is very, can translate very well to their operations. And you've seen them, we've been tracking these companies for now almost two years, and we have historical revenue. And we see that, yes, most of them make a small margin, and most of them are still investment mode. But so was Netflix 10 years ago. If you think about how Netflix was financing their growth through debt, particularly, and a lot of us in the entertainment industry thought they were overspending. But they had a very, very scalable playbook.

37:04And the question is -

37:04Peter Kafka:And now they're generating more profits than Disney. So they did figure it out. We've been talking a lot about TikTok. TikTok is a Chinese company that specializes in vertical video. We're talking about a vertical video format that comes out of China. It seems obvious to me that TikTok will be a big player here. And then indeed, they're trying a couple different experiments. Do you want to walk us through the different things TikTok is trying? Yeah. So TikTok, their sister company, ByteDance in China, the sister app, Duyan, was initially the most used for microdrama purchases. Since then, they launched a second platform called Huanggo, translated to Red Fruit, that's primarily ad supported and has become the place where most people watch microdramas in China.

37:53And in the U.S. early this year, they launched microdramas for the first time. They called them micro series on TikTok and on their own free dedicated microdramas called Pine Drama. So if you look at the rankings through our company, we have a service called the Vertical Index that tracks the viewership for about 37 ,000 titles. Up until two or three months ago, all the top titles came from one or two apps. Now Pine Drama is figured out very prominently on the top rankings, partially because they're free.

38:25Peter Kafka:Right. So the TikTok-owned app is making headway here. So I think there's three different things that TikTok is trying, right? They're allowing regular TikTok users to watch bits of microdramas. Seems obvious what you can do there. They have their own dedicated app where you can watch these things for free. And I think they're also playing around with their own subscription app, correct? They have some experiments in subscriptions, but on TikTok itself, they haven't yet, as I understand it, enabled subscription for microdrama players. But that's a logical step that will happen because that's what DuYan does in China.

39:00Peter Kafka:So for years, you'd see an interesting startup. And then the next question, the obvious question, the cliche question would always be, well, what happens if Facebook decides they want to get into this space or preceding that Yahoo? or what happens if one of the big consumer internet companies decides this is what they want to do? Doesn't that blow your startup out of the water? If you are a leading micro drama producer today, how worried should you be about TikTok coming in and sort of controlling your industry? If you're a producer, you should think of TikTok as a client and as a way of expanding your audience.

39:35Because remember, for all the strength of the dedicated micro drama platform that are purely microdama and nothing else, they only reach about 10 % of the U.S. population today, and TikTok reaches a much, much bigger number. And TikTok is, in addition to a licensure and distributor, a buyer of content. They're commissioned, they announced a few months ago, a show produced by Isara's company, Hooray. They were part of the Vertical Media Summit on a panel. So you're going to see them as not only a platform, but also a buyer. Meta has not yet announced anything in the macro space, but quietly in June, they enabled the release of serialized episodes on Instagram.

40:24And a lot of people see that as a precursor for them enabling the functionality that will allow producers to upload directly.

40:31Peter Kafka:So let me just restate the question. So whether it's TikTok or Instagram slash Reels, any big platform, these guys already have all of the eyeballs. They could show consumers all kinds of different content. Yes, they can be buyers, but aren't they, don't you imagine that eventually they'll just have so much sort of weight that they end up controlling the entire industry. And they're, they're essentially the Walmart sort of telling their producers, you can give us this much at this time, at this, at this rate. And the business becomes much less interesting unless you are TikTok or Instagram. I think that depends largely on what the streamers do, because the place we haven't talked about is what are Netflix, Disney, Peacock, Amazon going to do in this space?

41:17Peacock already has announced, actually launched, not just announced, two original microgramas. I can tell you every single one of those companies attended the Vertical Media Summit, and that wasn't just out of curiosity.

41:31Peter Kafka:I was going to ask you about this. So if you're a traditional media company and you know how to make long form content, you have libraries of it, you pay a lot of money for that and sports, et cetera. What is the upside of you playing around with microdramas and doing super budget things that anyone else can do? Why wouldn't you just concentrate on the stuff that you're particularly good at? Because if you are on Netflix, just naming them as one example, and you know that moving the needle on engagement is going to be increasingly more difficult. You want, at a minimum, to get viewers to think of you more frequently than they do today and in different moments of the day that they do today.

42:17There's no question, I think, in anybody's mind that in order to continue to win engagement, streamers need to win on mobile. In order to be present on mobile, You need to offer vertical first serialized better storytelling, better budgets, better production levels that what many of the existing producers are doing today or what's being commissioned today.

42:43Peter Kafka:So give people reasons to open up your app more frequently than they do now. This is also the Netflix podcast strategy, right? We're just going to give you more and more stuff. So there's always something for you to find if you open up your app, even if you don't want to watch a movie or a full TV show. That's exactly. If you think about the other side of what YouTube did over the last five years, very effectively YouTube built their strength on desktop, then became the number one mobile video destination, and then became the number one on television sets as far as time spent without losing any ground on mobile.

43:18Well, I think the streamers have the opportunity to do the reverse. They cannot see any ground on television. And by the way, Instagram is going after television sets as well. But they need to become a vehicle that people think about and go to during the day and more frequently, not just at night when they're at home.

43:38Peter Kafka:People who are listening to this who haven't played with microdramas are hopefully going to go find an app and go play with this stuff. I'm assuming and I probably shouldn't assume that they're gonna have the same reaction I have when they will see this stuff and they go Oh, I get it. These are really low budget soap operas and they're Bad even by soap opera standards. They're like the acting's terrible. The writing's terrible. All this stuff is super low budget Um thus I shouldn't take it seriously So when we if we make that evaluation if we look at that stuff if we have that reaction What are we getting wrong?

44:13Peter Kafka:Because obviously there is a consumer demand for this stuff. I think it's the same thinking that 10 years ago you would have gone to the podcast players and had listened to the average podcast and you probably would not have been impressed. But then there's a serial, there's the Daily, there's channels, there's a Wondery show at Dirty John, at Dr. Death. So it is true that there's a lot of volume that most people or many people, especially listeners of your show, will not respond to. But what they need to look at is what the vertical video space as an audio visual language can be. Think about the evolution of streaming and cable in the late 90s, oddies, and 10s, how it created so many different spaces for scripted entertainment at different kinds of quality levels and at different genres and subgenres.

45:10The same thing is going to happen to vertical storytelling.

45:13Peter Kafka:do you imagine this i keep thinking about quibi over and over i keep thinking about quibi having a video during their early launch where they were showing um how you might use their phone to watch videos they're literally like while you're waiting for your coffee to go you could you could look at a video um it seems to me that one of the mistakes that that quibi made was was making stuff that was too expensive um and that the audience at the same time they were not watching and paying for quibi they were watching a ton of TikTok, which varied widely in quality. And I'm wondering if that's the real lesson here, that consumers like all kinds of stuff and they like really expensive stuff and they like cheap stuff and they understand the difference and they're happy to consume all kinds of stuff.

45:57I think that's one lesson. The other one is that Quibi was too early and just spend too much per minute. And also wasn't necessarily vertical first. They were thinking about mobile, but remember that they had a way and they were asking producers to film for both vertical and horizontal. And that's limiting. That's really hard to write. And a lot of producers that, this is an argument I heard from somebody in the industry, were being pitched shows that had not been greenlit in traditional television and trying to shoehorn those shows and movies into the mobile format. I think if Quibi were to do it over again, they would probably do it vertical first and vertical only.

46:42Peter Kafka:Quibi 2.0. If you're listening, Jeffrey Katzenberg, let me know if you're interested. He's an investor in two companies, actually. There you go. Hernan Lopez, great to have you on. Thank you for explaining the business to us. Great. Thank you so much. Great to see you. Thanks again to Hernan Lopez. Thanks also to Ali Alvazaz. Thanks again to Charlotte Silver, who produces and edits this show. So thanks to our sponsors who bring it to you guys for free. Thanks to you for listening. So many words to say thank you. See you next week.

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